Heartbroken and bankrupt: Why divorce can destroy your finances
It’s well-known that debt can wreck a marriage. “Till debt do us part,” as financial guru and TV host Gail Vaz-Oxlade would say.
But breaking up won’t end your financial woes. Indeed, it can drive you deeper into debt and even lead to bankruptcy.
Divorce was a significant cause of insolvency for 14 per cent of respondents surveyed by Kitchener, Ont.-based debt management firm Hoyes Michalos.
Among those between the ages of 40 and 49, the share who cited marital breakdown as a leading cause of insolvency was as high as 20 per cent. For those between 30 and 39 years of age, it was a similar 18 per cent.
Why does divorce lead to bankruptcy?
There’s rarely a single cause of bankruptcy, says Douglas Hoyes, licensed insolvency trustee at Hoyes Michalos.
But if you were financially overstretched in marriage, divorce can push you over the edge.
Divorce lawyers will do their part in driving you deeper into the red. Legal costs range from $1,772 on average for an amicable split-up to as high as $46,578 for a contested divorce, according to a 2016 survey of legal fees by Canadian Lawyer magazine.
Still, legal battles don’t appear to be the chief cause of insolvency for divorced couples.
Back to the single life
The first reason that licensed insolvency trustees mentioned to Global News when asked about why divorce can lead to bankruptcy is the simple fact that going back to being single usually lowers your income and racks up costs.
“Two can live as cheaply as one” in marriage, by sharing fixed costs such as mortgage and utilities, said Hoyes. You also generally have two incomes supporting one household, he noted.
“It’s the double-whammy of divorce: Your income goes down, and your expenses go up,” he added.
Suddenly you’re back to carrying all the bills on your own, just like when you were starting out.
And while you might have been accustomed to surviving on pizza and popcorn in your pre-marriage days, resizing your life to fit your shrunken budget might not come easy after a divorce.
Being emotionally drained by the separation doesn’t make it any easier, said David Gowling, senior vice-president with MNP Debt, one of Canada’s largest personal insolvency practices.
Even if you are ready to downgrade your lifestyle, transitioning from your married life back to singledom can incur what one might call high re-startup costs.
If you’re moving out, for example, it might take you some time to find a new place to stay. And once you do, you might have to cough up enough cash for the first and last month of rent, said Hoyes. There are many such costs that can quickly add up, he noted.
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Women often more financially vulnerable in divorce
Although men are more likely to have higher incomes and higher debts, it is women who are often more disadvantaged by a separation, Hoyes notes. His firm’s survey found that as many as 30 per cent of women who had filed for insolvency were divorced, compared to 24 per cent among men.
Also, 45 per cent of them had dependents, compared to 34 per cent of men, and 27 per cent of females who went bankrupt were single parents, compared to only 8 per cent of males.
Women often have lower incomes and are awarded custody of the children, which can make expenses hard to manage, Hoyes said.
Being the higher earner in a divorced couple with debts is no walk in the park, either. Men who used to be the family’s breadwinners can get saddled with steep child support payments that can leave them with little to pay their own bills, especially if they happen to see their income dip after a separation, Gowling said.
But in Hoyes’ experience, it’s female debtors who are most vulnerable in a divorce.
Stuck together in debt
The irony of debt is that it can both break up your relationship and can keep your ex-spouse in your life after divorce, if the two of your have shared liabilities.
Unlike assets, which are usually divided equally in a separation, debts that carry both your and your spouse’s name cannot be split 50-50.
“The bank is not party to your divorce,” said Hoyes. From its point of view, you are both responsible for 100 per cent of your jointly held debts.
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Divorce agreements laying out whose responsibility it is to repay those debts will not prevent the bank from coming after both of you if your ex fails to uphold his or her part of the deal, Gowling points out.
In addition, “any missed payments or late payments will continue to affect your credit score no matter who was supposed to make them,” Rebecca Martyn, a Windsor-based licensed insolvency trustee at Hoyes Michalos, wrote in a post on the firm’s website.
There are other ways in which debt can make a divorce messy.
For example, one scenario Gowling has seen a few times is one partner “racking up a [shared] line of credit out of spite” right before the separation. Often the other spouse isn’t aware that this is happening, he added.
Your ex filing for bankruptcy can also leave you holding the short end of the stick. If he or she files for bankruptcy right before the divorce, the family’s house becomes part of the assets that will help pay off your spouse’s creditors. And while you are among those creditors, the house is no longer available for distribution in the divorce, noted Gowling.
A much better way to handle out-of-control shared debt would be for divorced couples to file bankruptcy together, which happens more often than you’d think, said Gowling.
Even better, you and your spouse could talk to your bank before signing any separation papers about setting up two distinct loans in each of your names to pay off your shared liabilities, wrote Martyn.
“Your bank probably won’t just remove your name from the account if there is an existing balance. They will want to be sure they can collect, despite your divorce. Once the old accounts have been paid off and balances transferred, close the pre-divorce credit accounts if that’s possible. At a minimum, get in writing from the bank any adjustment to the agreement as to who is responsible for payments,” she noted.
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